The demographics of a youthful population, the large domestic demand base and the high savings rate all remain positive. But increasingly, corruption and political atrophy threaten to overwhelm its future prospects.

Corruption Capital …

Petty corruption by poorly paid local officials has been common in India for decades. The real problem is a deep-seated and endemic corruption on a large scale, highlighted by scandals surrounding the issue of telecommunication licenses and also sales of coal assets.

A 9-month investigation by the auditor and Central Bureau of Investigation found that the Ministry of Communications and Information Technology sold licences for the use of spectrum for mobile telephony bandwidth at below market prices to telecoms companies in 2008. The report found that 85 of the 122 licenses were granted to companies that “suppressed facts, disclosed incomplete information and submitted fictitious documents.” The sale cost the Indian government and citizens lost revenues of around US$39 billion.

More recently, a draft report by the auditor accused the government of selling coal assets to major Indian industrial corporations at below market prices, resulting in a loss of (up to) $210 billion in lost revenues. There are even accusations of manipulation of the auction of licenses in the new Indian Premier league, a T20 cricket competition.

Commentators now compare some Indian businessmen to 19th-century American robber-barons.

Using corrupt means to access power and acquire influence over politicians, businesses have advanced their interest in several areas. They have secured rich natural resources, especially land and minerals. They have ensured a favourable regulatory framework and restricted competition, especially foreign competition, where possible. The unauthorised biography of Dhirubhai Ambani, the founder of the Reliance Empire now split between his sons, euphemistically notes his skill at “managing the environment”.

The problem involves both businesses and politicians. Historian Ramachandra Guha tells the story of a burglary of a prominent Indian Politician which only yielded the miscreant a gold sovereign and Rupees 800 (about US$ 20). Today, the haul might be better.

The retired head of India’s anti-corruption watchdog stated that as much as 30% of his compatriots were corrupt. Favours, bribes and even shares of business are now commonly demanded in return for assistance in securing contracts.

A 2009 Newsweek article The House in Ill Repute recorded the history of some members of the Indian Lok Sabha, the lower house of parliament. Under new laws pushed through by a group of college professors after years of fierce resistance from dozens of political parties, candidates for the Lok Sabha were required to disclose their assets and criminal records. The disclosures recorded that 128 of the 543 winners had faced criminal charges, including 84 cases of murder, 17 cases of robbery and 28 cases of theft and extortion. One member faced 17 separate murder charges. As Indian law only bars convicted criminals but not alleged criminals from running for or holding office, even convicted criminals can continue to hold political office pending the hearing of appeals, a process that can take up to 25 years in India.

Insecure India …

India’s economic challenges are compounded by internal and external insecurity.

In the title of his 1990 book A Million Mutinies, writer V.S. Naipaul pithily captured India’s internal political disputes. Today, about a third to a half of India is affected by the Naxalites, a violent Maoist insurgency which has been active for over the 50 years. Active in remote forested areas which are coincidentally rich in mineral resources, the movement has prevented development and also tied up substantial government resources.

More peaceful separatist movements abound in many parts of India, with ethnically distinct groups seeking their own separate State. Over the last 30 years, many Indian states have been sub-divided to accommodate these movements at great national expense.

The threat of religious conflict between Hindus and Muslims is ever present. The Chief Minister of Gujarat, frequently touted as a candidate for future Prime Minister, is unwelcome in many countries that refuse to grant him a visa because of his alleged involvement in sectarian violence.

Ongoing border disputes with Pakistan and China and the instability of AfPak (Afghanistan and Pakistan) dictates large defence expenditure. This is compounded by regional competition with China for influence requiring the capability to project military power into the Indian Ocean and also South East Asia.

In 2012, Indian defence spending is forecast to be US$41 billion, around 1.9% of GDP or the 9th highest in the world. Financing this spending diverts resources away from other parts of the economy.

Political Atrophy…

Political paralysis is a major impediment to economic development. Successive governments of every political persuasion have failed to undertake meaningful reforms, necessary to foster growth, employment and development.

Required changes in land and property laws have not been made. Problems in acquiring land are a factor in 70% of delayed infrastructure projects. The land acquisition process under a 19th century law requires changes, which remain unlegislated almost 3 years after amendments were proposed.

Reform of tax laws, including introduction of a direct sales tax correcting cumbersome difference between individual states, have not been completed. Changes to mining and mineral development regulations to allow proper, environmentally controlled exploitation of India’s mineral wealth have not been made.

Other crucial areas remains unaddressed – rationalising unwieldy and economically distorted subsidies, implementing economic pricing of utilities, promoting foreign investment in key sectors or reforming agriculture, especially the wasteful and inefficient logistics system for transporting produce to market. Reform of labour markets and privatisation of key sectors has not been progressed.

Dealing with corruption and reforming government process for the grant of licenses or property rights also remains incomplete.

India’s political system is an obstacle to change. Complex coalition governments are a barrier to decisive action. The current government failed to implement its plans to allow limited entry of foreign retailers as a result of protests from its own coalition partners as well as the opposition. The government also failed to get a key anti-corruption bill through parliament.

The current governing Congress led coalition and the BJP led opposition is weak, both crippled by corruption scandals. All parties are dominated by political monarchies (such as the Nehru-Ghandi dynasty) or by geriatric politicians who cannot or will not embrace change.

India’s fabled democracy is an increasingly ossified domain, where a complete inability to make hard decisions or undertake reforms makes government futile if profitable for some.

The Great Pretender…

In good times, Indian economic weaknesses were covered by moments of positive actions and good luck. But the economy faces increasingly difficult times ahead as the luck has run out.

Indian disappointing response to the challenges is to disavow the problem or to look for short cuts. The overall tendency is for “spin”, ignoring the fundamental failures. The country seems unable to face the truth and undertake fundamental long term changes.

In the 1980s, Indian sociologist Ashis Nandy observed that “in India the choice could never be between chaos and stability, but between manageable and unmanageable chaos”. The observation is relevant today as India deteriorates through its failure to carry through crucial reforms exacerbated by corruption.

Without urgent changes, India may never be able to live up to its promise, remaining always the Great Pretender.